The Sweetwater Candy Company would like to buy a new machine that would automati

Question

The Sweetwater Candy Company would like to buy a new machine that would automatically dip chocolates. The dipping operation is currently done largely by hand. The machine the company is considering costs $125,000. The manufacturer estimates that the machine would be usable for 12 years, but would require the replacement of several key parts at the end of the sixth year. These parts would cost $8,200, including installation. After 12 years, the machine could be sold for about $6,250. The company estimates that the cost to operate the machine will be only $9,000 per year. The present method of dipping chocolates costs $38,000 per year. In addition to reducing costs, the new machine will increase production by 4,000 boxes of chocolates per year. The company realizes a contribution margin of $1.00 per box. A 20% rate of return is required on all investments. Click here to view Exhibit 10-1 and Exhibit 10-2, to determine the appropriate discount factor(s) using 1. What are the net annual cash inflows that will be provided by the new dipping machine? Net annual cash inflows$ 33,000 factor(s) to 3 decimal places.) Net present value

Explanation / Answer

Req 1 Annual net cash inflows: Savings in operating cost: Cost of manual processing 38000 Less: Automated machine operating cost -9000 Net savings in cost 29000 Add: Additional Contribution derived 4000 (4000 units @ 1) Annual net cash inflows: 33000 Net Present value: Present value of net annual savings 146493.6 ($33000 *Present Annuity factor i.e.4.4392) Present Vale of salvage value 701.25 ($ 6250 *PVF at Year-6 i.e. 0.1122) Total Present Value of Inflows 147195 Present value of outflows: Present value of parts cost at Year-6 2746.18 ($ 8200 *PVF at Year-6 i.e.0.3349) Initial Investment 125000 Total present value of outflows 127746 NET PRESENT VALUE 19449

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